Tax Loss Relief under UAE’s Corporate Tax Law: Key Factors

Bijal

August 9, 2024

What Is Tax Loss and Tax Loss Relief Under UAE Corporate Tax Law?

Businesses may experience losses during the initial startup phase while it is investing in growing their Business, or sometimes mature businesses may make a loss over a period because of a temporary, adverse trading environment.

UAE Corporate tax law recognizes this very well and that’s why corporate tax is calculated on a company’s overall profitability throughout its existence and not just on a single year’s income.

It is also in line with international practice across the world that allows the taxable person to offset its loss incurred in one period against the taxable income of future period.

What is Tax Loss?

A tax loss refers to a loss, as per the tax laws, that a business incurs in a particular tax period. It occurs when a Taxable Person’s deductible expenses under the tax law exceed its income in a particular financial period.

What is Tax Loss Relief?

As per Article 37, Tax loss relief in the UAE’s corporate tax law allows businesses to offset losses from one tax period against taxable income in subsequent tax periods to arrive at the taxable income for that subsequent tax period.

Discover UAE Tax Loss relief and its implications on your business With guidance from our expert consultants.

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Circumstances of Non-availability of Tax Loss Relief Under UAE Corporate Tax Law

Under the following circumstances, tax loss relief is not available:

Losses incurred before the date of commencement of UAE Corporate Tax Law
Losses incurred by a Person before becoming a Taxable Person under the UAE Corporate Tax Law.
Losses incurred from an asset or activity, the income of which is exempt under the UAE Corporate Tax Law.

Limitations for Tax Loss Relief Under UAE Corporate Tax Law

Tax Loss Relief Maximum Amount:

A Taxable Person can carry forward Tax Losses and offset them against Taxable Income in subsequent Tax Periods, subject to meeting certain conditions.

The amount of tax loss that is allowed to offset against the taxable income of that subsequent period cannot exceed 75% of the taxable income of that subsequent period before claiming any tax loss relief against the taxable income.

Tax Loss Relief Maximum Period:

The CT law does not provide any restriction on the number of years for which the tax relief would be set off. Accordingly, the tax loss can be carried forward for an indefinite period.

This implies that every profit-making business would be liable to pay tax on the remaining twenty-five per cent of the income after adjustment of losses or full profit if there are no previous losses, while loss-making businesses will carry forward their losses for an unlimited time.

Can Tax Loss Relief Under UAE Corporate Tax Law be Carried Forward for an Indefinite Period?

According to Article 37 of the UAE CT Law, the tax losses can be carried forwarded to subsequent tax period for set off.

However, Article 39 imposes certain restrictions on the carry and forward of the utilization of the Tax Loss. Tax losses can be carried forward from one Tax period to a subsequent tax period only if the following conditions are satisfied:

Continuity of Ownership Requirement:

The UAE CT Law discourages the trading of loss. Acquisition of an entity just for the purpose of utilization of its tax loss is not permissible under the Act.

The CT law allows carry forward and set off of loss only if the same person or persons continues to hold at least 50% ownership interest in the taxable person throughout from the beginning of the tax period in which the tax loss is incurred to the end of the tax period in which the tax loss or part thereof is offset against taxable income.

For example, Company ABC and Company DEF are unrelated entities. Company ABC, incorporated in the UAE, incurs a tax loss of 2 million AED in its tax period. Company DEF approaches Company ABC with the intention of acquiring it solely for the purpose of utilising Company ABC’s tax loss.

In the above situation, Company DEF’s acquisition of Company ABC solely for the purpose of utilizing its tax loss would not be permissible under the UAE CT Law.

Continuity of Business Requirements:

In case of a change in ownership interest, the taxable person shall be allowed to carry forward and set off the losses only if the taxable person continues to conduct the same or similar business or business activity in which the loss was incurred. The following factors would be relevant to determine the continuity of the same or similar business or business activity.

The taxable person utilises some or all the assets as before the change in ownership
The taxable person has not made any significant changes to the core operations or identity of the business

The loss can be allowed to be carried forward and set off in case of change in the core identity or operations of the business, if the changes are resulting from of the exploitation or development of services, assets, resources etc. that existed before the change in ownership.

Special Conditions for Listed Companies:

The limitation on tax losses carried forward as per Article 39 will not apply where the shares of the Taxable Person are listed on the Recognised Stock Exchange.

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Transfer of Tax Loss between the Taxable Persons

As per Article 38 of the UAE CT Law, The Tax Loss may be transferred between the two Taxable persons where all of the following conditions are satisfied:

1. Both the taxable persons, transferor and transferee, should be juridical persons

Transferor	Transferee	Is transfer allowed?
Company	Company	Yes
Company	Shareholder	No
Shareholder	Company	No
Mother	Son	No

2. Both the taxable persons should be tax residents of the UAE.

Transferor	Transferee	Is transfer allowed?
Resident	Resident	Yes
Resident	Non-Resident	No
Non-Resident	Non-Resident	No
Non-Resident	Resident	No

3. Common Ownership Interest:

The taxable person should have an ownership interest of at least 75% in another taxable person directly or indirectly. Thus, a subsidiary can also transfer the tax loss to a parent company or vice versa, subject to the fulfilment of 75% ownership criteria. Further, the transfer of loss is allowed to a sister concern, commonly controlled by a third person directly or indirectly.

For example, X Ltd., an Indian company, holds 80% of two UAE-based companies, Y Ltd. and Z Ltd. Y Ltd. and Z Ltd. can transfer the tax loss internally as both the companies are controlled by a common ownership interest to the extent of 75% or more by a common company X Ltd.

4. Continuous Ownership Interest:

The ‘common ownership’ of 75% in both taxable persons should exist from the start of the tax period in which the tax loss is incurred to the end of the tax period in which the loss is transferred.

5. Both Taxable Persons are not Exempt Persons

Both Taxable Persons are not Qualifying Free Zone Persons
Both the Taxable person’s financial year should end on the same date
Both Taxable Persons prepare their Financial Statements using the same accounting standards

Case Study

Here is the case study which calculates the maximum amount of loss which can be transferred and utilised as per the facts provided:

AXE Ltd. holds 77% shares of WYE Ltd.

In tax period 1, AXE Ltd. suffered a tax loss of 200,000 AED.
In tax period 2, AXE Ltd. generated a taxable income of AED 60,000.
In tax period 2, WYE Ltd. earned a taxable income of AED 75,000.

Tax Period	AXE Ltd. Tax Loss	AXE Ltd. Tax Loss	Loss Set-off	WYE Ltd. Taxable Income	Max. loss transferrable to WYE Ltd.	Loss Carried Forward
1.	200,000	–	–	–	–	200,000
2.	–	60,000	45,000 (60,000 X 75%)	75,000	56,250 (75,000 X 75%)	98,750 (200,000-45,000-56,250)

In the above scenario, AXE Ltd. has brought forward a loss of AED 200,000 in tax period 1, which shall be carried forward to tax period 2. As per Article 37(4), the brought forward loss shall be utilised first against the taxable income of AXE Ltd. Accordingly, the maximum loss which can be offset against the taxable income of tax period 2 is 45,000 AED (75% of 60,000 AED).

Since AXE Ltd. owns more than 75% of shares of WYE Ltd., a resident taxable person, the tax loss of AXE Ltd. can be transferred and utilised to offset the taxable income of WYE Ltd. However, the quantum of loss cannot be more than 75% of the taxable income of WYE Ltd. Hence, AXE Ltd. can transfer a tax loss of up to 56,250 AED. (75% of 75,000 AED).

The remaining tax loss of 98,750 AED (200,000 AED – 45,000 AED – 56,250 AED) can be carried forward by AXE Ltd. to the tax period 3.

Seeking Professional Help to Manage Your Tax Loss Relief

The UAE Corporate Tax Law provides various tax loss relief provisions that can be strategically utilised to minimize a company’s tax burden. However, understanding these regulations can be complex, especially for businesses which are unfamiliar with UAE tax law.

However, a tax consultant can help in the following manner:

Maximizing Tax Loss Relief:

A consultant can make sure that the business claims all eligible tax losses and understands the rules of carry-forward of losses and their limitations.

Compliance with Ownership and Business Continuity Rules:

Tax consultants can advise on maintaining the required ownership structure and business continuity to qualify for tax loss relief.

Optimizing Loss Transfer Between Group Companies:

Consultants can guide businesses on fulfilling the conditions for transferring tax losses between group companies under the 75% ownership rule.

Mitigating Tax Risks:

Tax Consultants can help in identifying potential issues and ensure that tax loss claims made by the company is as per the UAE Corporate tax law’s regulations and provisions.

Conclusion

Tax loss relief provisions under Articles 37, 38, and 39 of the UAE Corporate Tax Law serve as vital tools for businesses to manage their tax liabilities effectively. By allowing the offsetting of losses against future taxable income, UAE CT Law promotes investment, entrepreneurship, and economic growth.

However, it’s crucial to understand the conditions and limitations drafted in these provisions. The requirement for continuity of ownership and business activities ensures that tax relief is granted within a legitimate business context, and it strongly prevents the abuse of this mechanism to gain any kind of false advantage by way of availing of the wrong tax loss relief.

Also, the ability to transfer tax losses between related entities under certain conditions helps the business in strategic tax planning within the corporate groups.

Compliance with these regulations demands a deep understanding of UAE tax law and due to such complexities taking professional assistance from tax consultants is very much required. FAME being a leading Tax consultant in UAE, offers expertise in maximizing tax loss relief, ensuring compliance with ownership and business continuity rules, optimizing loss transfers between group companies, and also mitigating tax risks.

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Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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UAE Corporate Tax Group: Pros, Cons, and Considerations

Bijal

August 5, 2024

In the UAE Corporate Tax Law, a tax group refers to a special arrangement where two or more resident companies can come together to operate as a single taxable entity, subject to the conditions of Article 40 of the Corporate Tax Law.

This means If the companies meet the requirements to form a UAE Corporate Tax Group, and their application to form such Tax Group is approved by the Federal Tax Authority, they can file a single UAE CT return covering all the members of the Tax Group.

Who Can Form a UAE Corporate Tax Group?

A resident parent company, along with its one or more subsidiaries, resident in the UAE (taxable person), can form a tax group, functioning as a single taxable entity for corporate tax purposes.

What Conditions Need to be Fulfilled to Form a UAE Corporate Tax Group?

The following conditions need to be fulfilled to form a UAE Corporate Tax Group:

Juridical persons

Each person forming part of the ‘Tax Group’ should be a juridical person. The natural persons (Individuals) cannot constitute a ‘Tax Group’.

Tax Residents

All members of the group must be resident companies in the UAE. Non-resident persons or foreign companies cannot be added to the tax group.

Parent Company	Subsidiary	Allowed?
Resident	Resident	Yes
Resident	Non- Resident	No
Non- Resident	Non- Resident	No
Non- Resident	Resident	No

A foreign juridical person effectively managed and controlled in the UAE would be treated as a resident person for the purpose of tax grouping subject to maintenance of the following documentation that such an entity is not a resident in any other country:

(a) A confirmation from the relevant tax authority of the other country; or

1. The parent company should own at least 95% of the ownership interest

A confirmation from the relevant competent authorities for the purpose of the application of tax treaties in force supporting non-residency in another country.

A Parent Company can form a tax group with its resident subsidiary if it meets the Ownership Requirement as stated in Article 40(1) of the Corporate Tax Law, accordingly – the parent company must hold, directly or indirectly, at least 95% of the following in each subsidiary:

Share capital
Voting rights
Entitlement to profits and net assets

2. None of the company is an Exempt Person:

Neither the parent nor any subsidiary can be an exempt person or a Qualifying Free Zone Person (QFZP).

Exempt persons include public charities, government entities, and certain specialized activities.
QFZPs are companies operating in designated free zones with their own tax regimes

3. Shared Financial Year and Standards:

To ‘Tax group’, the CT Law mandates that the financial year of each taxable person should end on the same date. The Parent Company and subsidiaries cannot follow two different financial years. Also, each tax group should have prepared their financial statements using the same accounting standards.

Confused about where to begin with your UAE Corporate Tax Group journey? Uncover the essentials of forming a UAE Corporate Tax Group with expert guidance.

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Pros of Forming a UAE Corporate Tax Group

Single filing required

The tax group is required to file only one consolidated tax return under UAE Corporate Tax Law.
This will significantly simplify the tax compliance compared to filing of individual returns for each member separately.

No applicability of Arm’s length principles and Transfer Pricing Documentation

Transactions between group members are exempt from arm’s length requirements and transfer pricing documentation. This significantly reduces the burden and complexity of proving fair market value for intra-group transactions

Losses of one company set off in the same year with another company leading to cash benefits

Losses incurred by one group member can be used to offset the profits of other members in the same tax year. This allows profitable companies to utilize the losses of loss-making companies within the group, potentially reducing the overall tax liability and generating immediate cash flow benefits

Lower compliance burden due to single Corporate Tax return

Under the UAE Corporate tax law, tax group to apply for only one corporate tax registration on behalf of all the companies of tax group and such tax group is required to file only one consolidated return instead of filing separate returns for every member company of the Tax Group. This will simplify the overall administration part for the tax group, and it also reduces the compliance cost as well.

Cons of Forming a UAE Corporate Tax Group

Single exemption limit irrespective of tax group members

Under the UAE Corporate Tax Laws, once the tax group is formed, the threshold of AED 375,000 applies collectively to the entire tax group rather than to each member individually.
Under the UAE Corporate Tax Laws, once the tax group is formed, the threshold of AED 375,000 applies collectively to the entire tax group rather than to each member individually.

Mandatory to prepare consolidated financial statements

The Formation of Tax groups mandatorily requires the preparation of consolidated financial statements in accordance with applicable accounting standards.
This will make the overall accounting process complex and lead to higher compliance costs compared to the preparation of individual financial statements.

Triggers joint as well as several liabilities

All members of a tax group share joint and several liabilities for the entire tax group’s corporate tax liabilities. This implies that group members are collectively and individually responsible for meeting corporate tax obligations.
So, in case any member denies making the payment of their individual share, other members can be held responsible for the payment of the entire corporate tax liability.

Potential complications on engaging in M&A activity

Joining or leaving in the tax group may lead to complications during mergers and acquisitions (M&A) activities.
Changes in the overall group composition can have implications on tax positions and restructuring among the group members might be required during the mergers and acquisitions.

Limited to parent-subsidiary relationships, resident, and taxable persons

The formation of a UAE Corporate Tax Group is limited to parent-subsidiary relationships, and it applies to only entities that are residents and taxable persons.
Due to such restrictions, certain types of business entities cannot form a Tax group to enjoy the benefits of group taxation.

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Conclusion

What is tax group is one of the most frequently asked questions. A Tax Group is a specialized arrangement wherein two or more resident companies consolidate their financials and operate as a single taxable entity. Key prerequisites for tax group registration in UAE include the following: each member should be a juridical person, each participant should be a UAE tax resident and not exempt under UAE CT Law, the parent company should own at least 95% of the ownership interest, and shared financial years and accounting standards are mandated among all the subsidiaries of the Tax Group.

As an entity, a Tax Group enjoys multiple benefits, including a simplified tax group registration process, consolidated tax filing, exemption from transfer pricing documentation, and the flexibility to offset losses against profits within the group. However, Tax Groups face various challenges, including a collective exemption limit for the entire group, mandatory preparation of consolidated financial statements, joint and several liabilities for tax obligations, complexities during mergers and acquisitions, and limitations to parent-subsidiary relationships among resident and taxable entities.

Forming a UAE Corporate Tax Group can offer several advantages, but careful analysis of UAE CT treatment to group structure is crucial before deciding. An assessment of the potential benefits against the drawbacks, considering your specific group structure, financial situation, and future plans, is essential.

FAME is one of the best corporate tax consulting firms in UAE. We help businesses with tax group registration, impact assessment, and tax compliance services.

FAQs

Can UAE subsidiaries of a foreign parent company form a Tax Group for UAE Corporate Tax purposes?

Being owned by a foreign parent company does not preclude UAE subsidiaries from forming a Tax Group, but the UAE subsidiaries must be held by an intermediary UAE parent company that will be the “parent” of the Tax Group for UAE CT purposes.

Will the 0% Corporate Tax rate threshold apply to the Tax Group as a whole?

Yes. The AED 375,000 threshold for Taxable Income subject to the 0% Corporate Tax rate will apply to the Tax Group as a single Taxable Person, irrespective of the number of entities in the Tax Group.

What are ‘pre-Grouping Tax Losses’?

Pre-Grouping Tax Losses are Tax Losses that are accrued by a Taxable Person before joining or forming a Tax Group.

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Public Clarification No. 38 (Manpower vs Visa facilitation services)

Bijal

June 14, 2024

FTA has come up with a new public clarification no. 3 Manpower vs Visa facilitation services 8 (Manpower vs Visa Facilitation Services), which can resolve one of the challenges faced by UAE companies in the application of VAT.

This clarification arises in the instances where an employment visa is held by one company while the employees work under the supervision and control of another company.

There are two kinds of supply which having different VAT treatments in this scenario. Therefore, it’s necessary to identify the supply for applying the correct VAT treatment: Manpower Services or Visa facilitation services.

Let’s understand in detail for each of these supplies and its treatment under VAT.

Manpower Services

When a Company (Supplier) identify/recruit/hire the candidates and make such employees available to another Company (Customer), then it is generally regarded as a taxable supply of manpower services under the VAT legislation.

Here, the Supplier is generally responsible for all the employment obligations, including the payment of salaries and other benefits. Besides that, the Supplier will be responsible for ensuring whether the employee has performed their duties and the quality of work as well.

Value of supply: Consideration includes the full amount received or expected to be received by the Supplier from the Customer, including employees’ salaries, benefits, or any additional amount charged and other recharges related to manpower services.

I.e., Consideration = Salaries & other benefits paid to employee (whether paid by Supplier/Customer)+ any additional amount charged by the Supplier respect to this supply

Visa Facilitation Services

This is like an exception to manpower services. A supply would not be treated as a supply of manpower services but instead, as a supply of visa facilitation services when all the following conditions are satisfied:

1.The employment visa holder (“Facilitator”) and the Customer are part of the same corporate group but are not part of the same tax group. (If it is under the same tax group then such supply would be out of scope in VAT)

Here, a question arises: what is the corporate group?

These are companies operating in the same corporate structure, which includes common ownership of the companies specified under clause (2), article (9) of Executive Regulation.

2. The Facilitator’s business activities do not include the supply of manpower.

This means if the facilitator supplies any manpower services to any person the condition will not be met.

3. The facilitator is not responsible for any of the obligations related to the employee

As a part of visa facilitation, customers take responsibility for the following obligations:

Payment of an employee’s salary.
Payment of other monetary benefits, including financial incentives, annual flight allowances, and housing allowances.
Provision of medical insurance and accommodation

So, the customer has to pay all these employee obligations.

And facilitator’s obligation is limited to incurring the cost relating to obtaining the employment visa

4. The Facilitator sponsors these employees to exclusively work for and under the supervision and control of the Customer.

Implies that employees exclusively work for the Customer and are under that Customer’s supervision and control, this condition would be met.

If any of the conditions above fail to be met by the facilitator, then such supply shall be treated as a supply of manpower services

Nature of Supply: Visa facilitation services are also regarded as taxable supply in UAE

Value of Supply: Value of facilitation services differ from value of manpower services

Here Value of supply = amount changed for the services which could include the recharge of expenses such as typing fees, medical tests and issuance of employee Emirates IDs

The value of the supply of visa facilitation services excludes the employee’s salary, annual flight allowance, and any other monetary benefits, as these are the obligation of the customer.

In short, what FTA trying to differentiate here is the value of supply between these two services i.e. manpower Vs visa facilitation services, which can be summaries below;

Special valuation rule for supply between related parties & supplies without any consideration

Value of Supply – Related parties

Case-1: The facilitator charges a fee that’s equal to the market value of the supply, The fees charged would be regarded as consideration for the taxable supply of services, and that will be the value of supply.

Case-2: The facilitator charges a fee that is less than the market value, then the value of supply is the market value of the supply; the facilitator is required to impose VAT on the market value of the supply, regardless of the actual amount charged for the visa facilitation services.

Value of Supply – No fee is charged

When supply happens without any consideration, the provisions of the deemed supply will trigger.

However, if the supplier has not recovered the input VAT for the related goods or services, a supply made by him without consideration will not be regarded as deemed supply (Article 12 of VAT decree-law).

When a Facilitator provides facilitation services to customers without charging any fee there are two possible scenarios

Case 1: If the facilitator does not recover the input VAT incurred to make the supply, then the supply of visa facilitation services will not be deemed supply. It would fall outside the scope of VAT.

Case 2: The facilitator recovered any input VAT tax to supply the visa facilitating services, the facilitator will be required to account for the output tax due based on the total cost incurred to make the supply, including direct and indirect costs.

(Here “direct cost” refers to costs that specifically relate to the services provided within this context, including typing fees, logistics, and any other fees charged for the purpose of visa issuance. “Indirect costs” refers to overhead expenses (e.g. office rental and utilities) as well as other general operational expenses incurred by the Facilitator).

In instances where the Facilitator is unable to calculate the cost of providing the visa facilitation service, the market value of similar services may be used as an indication of the value of the supply.

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Examples for Manpower vs Visa facilitation services

Supply of Manpower Services (Example 1)

Company A holds the employment visas for employees working at Company B. Company A makes these employees available to Company B. Hence, Company A is regarded as supplying manpower services irrespective of whether the employees’ salaries and benefits are paid by Company A or Company B.

The consideration for the supply of manpower services is equal to the total amount incurred by Company B, including salaries and benefits (irrespective of whether the employees’ salaries and benefits are paid by Company A or Company B), as well as any amounts related to the services provided by Company A to Company B in relation to the supply of the services.

Supply- Exception to Visa Facilitation Service (Example 2)

Company A holds employment visas for persons working for Company B. Company A and B are part of the same corporate group.

As part of Company A’s operations, it also provides secondment services to businesses outside its corporate group. Company A is, therefore, regarded as supplying manpower services, and the supply does not meet the second condition.

Consequently, the supply of visa support services provided by Company A to Company B does not qualify as a supply of visa facilitation services and Company A is regarded as supplying manpower services to Company B.

Uncover the difference between Manpower services and Visa facilitation services Define your employment visa supply status with us.

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Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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Economic Substance Regulations (ESR) Audit Intimation– Response Preparation and Documents Required

Economic Substance Regulations Audit Intimation Response Preparation and Documents Required

Bijal

May 24, 2024

Under the Cabinet of Ministers Resolution number (57) of 2020 concerning Economic Substance Requirements and ministerial decision number (100) of 2020 to comply with the Economic Substance Regulation (ESR) you are under audit.

If you or your entity received ESR Audit notice from National Assessing Authority, this article comes handy as we cover primary factors that should be taken care of. You can also keep this article as your go-to resource for future reference.

What is an Economic Substance Regulations (ESR) Audit Notice?

Federal Tax Authority (FTA), being the National Assessing Authority, may undertake assessments to determine whether a Licensee has met the Economic substance Test or not. FTA can either send additional Information request or issue audit Notice in this regard.

As per the Economic Substance Regulation, UAE entities whose business activities meet the scope and definition of any of the nine ESR relevant activities, are required to prepare and submit Economic substance Notification and Economic Substance Report.

Relevant Activities Under ESR Law

Banking Business
Insurance Business
Investment Fund management Business
Lease – Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property Business (“IP”)
Distribution and Service Center Business

Such reporting entities are Licensees for ESR law.

Find out what documents you need for ESR audit Get prepared early and stay ahead with FAME Advisory.

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How is the Economic Substance Regulations (ESR) Audit notice issued?

Licensee (Being a UAE Business entity) subject to ESR Audit will be sent intimation either on the registered email or resubmit link will be activated on the ESR Portal or both. The Tax Auditor from Federal Tax Authority will send email to the registered email address indicating the submission requirements.

For ESR Audit licensee will get ‘you are under audit’ email from the tax auditor of Federal Tax Authority. The email notifies about the entity under audit, List of requirements to be submitted and time frame or submission deadline. Usually, FTA gives 5 business days from the date of Audit Notification for submitting the Audit Response.

One may also get additional Information request from their License issuing Authorities, with regards to the ESN or ESR submitted, where in an information for supporting your submissions may be assessed.

What are the details asked under Economic Substance Regulations (ESR) Audit Notice?

One of the most common ESR audit challenges that licensees have is the detailed asked under the ESR audit.

The ESR Audit intimation usually comes with a File name – Initial List of requirements. It has standard set of questions and requirements.

There is an exhaustive list that requires you to submit large amount of information with the deadline of five business days.

To make it easy for you to understand the complete list, we have categorized the information requested under ESR audit:

Company related general documents – Trade License, Lease agreement
Constitutional documents – Memorandum of Association, UBO declaration
Employee Details – CVs, Timesheets, Employee Contracts, Passport, Visa and Emirates ID of the Employees, working papers for calculation of Full Time Employees.
Financial Information – Audited Financials/Management Accounts, Working Papers for calculation of Relevant Income, Profit/Loss attributable to the relevant activity
Relevant Activity Information – Clarification for type of Relevant Activity reported and justification as to how business activity meets the Relevant Activity criteria.
Assets details – Details of Physical assets held in UAE, Lease Agreements, Title Deeds/purchase agreements of the assets
Boar Meetings – The questions relating to number of board meetings held within UAE and Outside UAE, Number of resident directors present, details of resident directors and non-resident directors, explanations in case no meetings were held during the reporting year
Outsourcing Information – If the main activity of the business is outsourced, all the information related to Outsourced activity, Entity to whom activities are outsourced and other related information

You can use this as ESR audit preparation checklist for documents. Overall, the list has more than 30 items which includes questions and documentary evidence. In substance, everything asked revolves around the submissions done at the time of Filing your Economic Substance Notification and Economic Substance Report. Therefore, don’t get anxious looking at the long list of requirements. Yes, you are mostly prepared at the submission stage and in the Audit stage, you only need to organize and present your documents and justification.

Explore the relevant activities under ESR Law Ensure your ESR documents are compliant with our expert help.

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How to Submit Economic Substance Regulations (ESR) Audit Response?

Tax Auditor of Federal Tax Authority can ask you to submit the information in the following ways:

Email Response – Reply to the email received from the FTA Tax Auditor with the response letter and all the documents and working files prepared.

ESR Portal Response – If the Audit Intimation email says – click on the link to submit your response – you have been asked to submit Audit Response on ESR portal through your dashboard. Click on the link, Login and you will find resubmit link against the Financial Year column for which Audit has been initiated.

How will I know if the Information provided would suffice?

After the review of your submissions, the FTA will ensure it has received all the information it requires to conduct the audit. So, you may receive the request (on registered email address) to resubmit some information or submit additional information. But if no such email comes after your submission – You have done it all right, as far as submission of response is concerned.

Economic Substance Regulations (ESR) Audit Conclusion

So long as the working papers, relevant activity information and the documents of the company can evidence that your entity meets the Economic substance Test, the Audit will conclude, and the Auditee receives confirmation as below –

the National Assessing Authority determines that a Licensee or an Exempted Licensee has failed to comply with applicable provisions of the ESR Regulations, the National Assessing Authority may impose various administrative penalties as set out under ESR Regulations.

What are the important aspects to be considered for Economic Substance Regulations (ESR) Audit?

Note that, FTA is assessing whether Reporting entity meets the Economic substance Test or not? Here are the key requirements of Economic substance Test

- The Licensee conducts Core Income-Generating Activities (“CIGA”) in the UAE.
- The Relevant Activity is directed and managed in the UAE;
- Having regard to the level of Relevant Income earned from a Relevant Activity, has an:

1. 1. adequate number of qualified full-time (or equivalent) employees in relation to the activity,
  2. incurs adequate operating expenditure by it in the UAE
  3. has adequate physical assets (e.g. premises) in the UAE.

Verify the details submitted in the Economic Substance Report and ensure that all the information submitted therein is same as the Audit Response you will be submitting.
Arrange the documents and mark them in the same series in which they are asked in the Initial Requirement List – this will ensure that no document or information is missed out.
All the explanations and working papers should be provided in separate files and keep the file names in context of the information asked. For instance, if you are providing the Employee Register – Name it as Working Paper for calculation of Full Time Employees (FTEs)

FAME Advisory’s Economic Substance Regulations (ESR) Audit Service

We have been assisting clients in conducting ESR registration as well as handling ESR audit requirements for them. FAME Advisory prepares the complete documentation and response on the behalf of licensee and ensure that the companies meet the requirement of Economic Substance Test.

This article summarizes all the practical aspects that we have dealt with so far, while handling ESR audit process for our clients. It will help you at the time of your ESR Audit. Keep this as your guide and avoid rush in preparing your audit response within just 5 days.

If you want assistance in preparing your ESR Audit response or are looking for ESR filing services, feel free to reach FAME Advisory DMCC.

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Treatment of Unrealized Gains and Losses Under UAE Corporate Tax

Bijal

May 17, 2024

For calculating taxable income under the UAE Corporate Tax law (the CT law), general rules for determining taxable income- defined under Article 20 of the Corporate Tax Law (CT law) are to be considered. According to Article 20 (2) of the CT law – taxable income for a tax period shall be calculated by considering accounting income and making specific adjustments defined under Article 20 (2); the first adjustment is for – any unrealized gains or losses under UAE Corporate Tax.

In this article, we will see how unrealized gains and losses are treated and how they impact the computation of Taxable income. We will first understand the Term realisation principle with ‘Unrealized Gain /Unrealized Loss’.

What is the realisation principle, and when is income realised for UAE Corporate Tax purposes?

As under many other Corporate Tax systems, the UAE Corporate Tax regime allows Taxable Persons to apply the realisation principle for determining their Taxable Income. This means that income will be taxable, and a deduction would be allowed only when a gain or loss is realised. Realisation would happen, for example, when the relevant asset is sold or terminated

Under the realisation principle, the Taxable Income for each Tax Period would exclude unrealized gains and losses in respect of assets or liabilities that are subject to fair value or impairment accounting or held on the capital account, depending on the election made by the Taxable Person.

What are Unrealized Gains and Losses Under UAE Corporate Tax?

Let’s have a look at unrealized gains and losses specifically:

Unrealized Gains:

In simple terms, the gains which have not yet been realised in cash are known as unrealized gains. For example, items such as financial instruments, which are liquid and short-term, are subject to the fair value of accounting.

An unrealized gain is an increase in the value of an asset or investment that has not been realised in cash; it becomes a realised gain when the asset or investment is sold.

Unrealized Losses:

The losses that have not yet been suffered or occurred are unrealized.

An unrealized loss is a decrease in the value of an asset or investment that has not been realised in cash; it becomes a realised loss when the asset or investment is sold.

Following accounting items can be referred to as unrealized gain/loss:

Provision for expected credit loss;
Provision for slow-moving inventory;
Derivate financial instruments;
Impairment of property, plant and equipment;
Impairment of investment property;
Unrealized foreign exchange gain or loss;
Financial assets or liabilities carried forward at fair value through profit or loss (FVTPL) – forward exchange contracts not used for hedging;
Investment property fair value changes;
Adjustment for loss on revaluation of intangible assets.
Adjustment for loss due to revaluation of property, plant and equipment;

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What will treating the Unrealized Gains and Losses Under UAE Corporate Tax be?

While computing taxable income for the relevant tax period, a taxable person who prepares their financial statements using the accrual basis of accounting may elect the following option:

Option 1: No Election

Unrealized gains/losses on assets and liabilities held on both capital and revenue accounts will be treated as taxable or deductible as they arise. i.e., on” Accrual Basis. Accordingly, no corresponding adjustment for provisions shall be made while computing taxable income.

Option 2: Election to recognise gains or losses on a “Realisation Basis” for UAE CT Purpose for all assets and liabilities

The Taxable Person can elect to recognise gains and losses on a ‘realisation basis’ for UAE Corporate Tax purposes for all assets and liabilities that are subject to fair value or impairment accounting – that is, any and all unrealized gains would not be taxable (and conversely, any and all unrealized losses would not be deductible) until they are realized. Any unrealized gains or losses on all capital and revenue items need to be adjusted in the computation of taxable income.

Gains and losses incurred with respect to the assets and liabilities which are valued at their fair value or impairment accounting as per the applicable accounting standards shall not be taken into consideration while calculating the Taxable Income subject to the election made to tax gain/losses on realisation basis

For assets categorised as capital items (property, plant & equipment,) the unrealized gains will not be taxable until they are realised (Ex. At the disposal of assets or investments) subject to the election made to tax gain/losses on a realisation basis.
Once an option to tax on a realisation basis is elected, the Taxable person cannot claim a tax deduction for unrealized losses on capital items under UAE tax law. The deduction benefit only applies to realised losses when you sell the asset or investment. That means a loss on revaluation of assets that can occur due to a decrease in the asset’s value cannot be claimed as a deduction as there is no actual economic loss. The actual loss incurred at the time of the sale of assets will be allowed as a deduction during the computation of Taxable Income.

Option 3: Election to recognise gains or losses on a “Realisation Basis” for UAE CT Purpose for all assets and liabilities held on Capital Account only

The Taxable Person can elect to recognise gains and losses on a ‘realisation basis’ for UAE Corporate Tax purposes for all assets and liabilities held on capital account only (i.e. not expected to be sold or traded during the regular course of the business operations) – that is, only unrealized gains and losses in respect of all assets and liabilities held on the capital account would not be taxable or deductible, respectively, until they are realised. Any unrealized gain or loss on a capital item must be adjusted in the computation of taxable Income.

Unrealized gains and losses arising from assets and liabilities held on the revenue account, on the other hand, would continue to be included in Taxable Income on a current basis. Any unrealized gain or loss on a capital item needs to be adjusted in the computation of taxable Income.

As per Clause 4 Article 20 of the UAE CT Law,

“Assets held on capital account” refers to assets that the Person does not trade, assets eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.

“Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this Decree-Law, or liabilities treated under applicable accounting standards as non-current liabilities.

Options 2 and 3 mentioned above, as prescribed under Article 20(3) of the CT law, are available only to taxable persons who prepare their financial statements on an accrual basis. Therefore, a taxable person using the accrual method of accounting may choose the realisation basis or decide not to elect any option, which means no corresponding adjustments for provisions will be made while computing the taxable income.

A taxable person, other than a bank or insurance provider, who prepares financial statements on an accrual basis of accounting may elect to consider gains and losses on a realisation basis. The election for the realisation basis must be made by the Taxable Person during the first Tax Period, which will be practically at the time of submitting the first Tax Return. The election to use the realisation basis is irrevocable. However, it may be revoked under exceptional circumstances and approval by the FTA

Adjustments allowed to be made under these methods

As per ministerial decision No. 134 of 2023, In case a Taxable Person who prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis about all assets and liabilities that are subject to fair value or impairment accounting and assets/liabilities held on capital account under the applicable accounting standards, the following adjustments shall be made:

Exclude depreciation, amortisation, or other change in the value of assets other than financial assets, to the extent adjustment amount related to a change in the net book value exceeding the original cost of the asset;
Exclude change in value, including amortisation of liability or a financial asset, except gain or loss arising upon realisation of liability or financial assets;

Case Study for Treatment of Unrealized Gains and Losses Under UAE Corporate Tax

This case study covers the important aspects of unrealized gains and losses under UAE Corporate tax taking the example of UAE resident companies.

Adjustment of Taxable Income in case of an asset held on capital account

During the Financial Year ending 31 December 2024, an LLC, a UAE resident company, recognised a revaluation gain in its financial statements of AED 1,000,000 for some buildings, measured at fair value.

The original cost of the building was AED 4,000,000 and after making the revaluation the net book value of the building is AED 5,000,000. The building was not sold at the end of the tax period and, therefore, the revaluation gain is considered ‘unrealised.’

Adjustment to be made while computing the taxable income

During the Financial Year ending 31 December 2024, an LLC, a UAE resident company, recognised a revaluation gain in its financial statements of AED 1,000,000 for some buildings, measured at fair value.

The original cost of the building was AED 4,000,000 and after making the revaluation the net book value of the building is AED 5,000,000. The building was not sold at the end of the tax period and, therefore, the revaluation gain is considered ‘unrealised.’

If no election is made

An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the Tax Period ending on 31 December 2024.

If election is made

An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the revaluation of capital assets (i.e. Building) during the Tax Period ending on 31 December 2024.

If election is made

An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the revaluation of capital assets (i.e. Building) during the Tax Period ending on 31 December 2024.

If the election is made to tax on a realisation basis

the realisation basis in respect of all assets and liabilities that are subject to fair value or impairment accounting (Option 2), then the company would have to exclude the revaluation gain of AED 1,000,000 when calculating their Taxable Income for this Tax Period.

Adjustment of Taxable Income in case of an asset held on revenue account

Company Y specialises in kitchen appliances. Due to shifts in the market, Company Y anticipates the need to discount some of its products to facilitate their sale. Consequently, it created a provision for a slow-moving inventory of AED 100,000 at the end of its fiscal period. At this time, Company Y still holds the inventory, so the loss recorded in its financial statement is considered unrealised

If no election is made or option 3 is elected

If no option is elected or option 3 is elected, then said provision debited to profit and loss shall be allowed as a deduction under CT law while computing the taxable income

If the election is made and Option 2 is elected

If the election is made to recognize the gain or loss on realisation basis for all assets and liabilities including the revenue items (Option 2) then adjustment need to made while computing the taxable income and consequently said provision shall not be allowed as a deduction.

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Conclusion

The treatment of unrealized gains or losses under the UAE Corporate Tax Law significantly impacts the computation of taxable income for businesses.

Understanding the unrealized gains and losses under UAE corporate tax is crucial, as they represent changes in asset values that have not yet been realized in cash.

UAE Corporate Tax law provides options for accounting for these gains and losses, either through the fair value method or by considering assets and liabilities held in capital accounts. The decision to make an election regarding the realization basis must be carefully considered, as it can have long-term implications and is generally irrevocable except under exceptional circumstances

Taxable persons must analyse the benefits and drawbacks of each option to determine the most advantageous approach for their specific circumstances. Furthermore, seeking professional assistance from tax consultants can greatly facilitate the process of calculating taxable income, ensuring accurate classification of assets, and smooth operations while minimising errors.

Ultimately, a thorough understanding of the treatment of unrealized gains and losses is essential for businesses to comply with UAE tax regulations and optimise their tax liabilities

Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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How Can UAE’s General Anti-Abuse Rules Impact Your Business?

Bijal

April 22, 2024

It is common for businesses to do such tax planning and design strategies to reach the optimum tax liability scenario. With the announcement of the implementation of Corporate Tax in UAE, businesses would have started evaluating their current profitability scenarios to get an idea of their estimated tax liabilities once their tax assessment is completed for their reporting years.

To ensure that tax planning does not become tax evasion, certain rules have been applied under the CT Law. These rules intend to prevent tax strategies and planning that are made with the intention of evading taxes or reducing tax liabilities. Let us see in detail what these rules are and how they are applicable under UAE Corporate Tax Law.

What are Anti-Abuse Rules in Taxation?

Let’s start with understanding the terminology.

In the context of ‘Taxation’, the word ‘Abuse’ means ‘Misuse of tax law’. The rules formulated to prevent the misuse of tax laws are called anti-abusive rules.

Anti-abusive rules (AAR) are common rules around countries worldwide to prevent taxpayers from creating loopholes or manipulating the system to minimize their tax burden.

These rules follow the principle of “substance over form,” meaning thereby that the tax authority looks beyond the legal structure of a transaction and focuses on its true purpose to identify the correctness of the taxable income presented by the taxable person in front of the tax authorities.

General Anti-Abuse Rules Provisions under CT LAW

These rules follow the principle of "substance over form," meaning thereby that the tax authority looks beyond the legal structure of a transaction and focuses on its true purpose to identify the correctness of the taxable income presented by the taxable person in front of the tax authorities.

General Anti-Abuse Rules (GAAR):

The CT Law introduced General Anti Avoidance Rules and mandated the principal purpose test for transactions, which states that any transaction should not be conducted with only tax advantage as a motive. If that is the case, those transactions could be adjusted or recharacterized by the tax authority.

Reference to Legal provisions

As per Article 50 of UAE Corporate Tax Law:

The provisions of the GAAR apply where it can be reasonably ascertained that:

Taxable person has undertaken any transactions or arrangements without any valid commercial rational or other non-fiscal reason which fails to reflect economic reality;

This means that GAAR provisions do not apply to transactions or arrangements carried out with intentions of valid commercial or non-fiscal reasons that reflect economic reality. Here, while evaluating the transactions or arrangements or any part thereof, the intention of the taxable person behind undertaking such transactions shall be deeply examined.

The primary purpose of undertaking such transaction, arrangement, or any part thereof should be to obtain a corporate tax advantage that is not consistent with the intention or purpose of the CT Law.
Here, Corporate tax advantage includes, but is not limited to, the following:

- A refund or an increase in the refund of corporate tax or
- An advancement of the corporate tax
- Avoidance or reduction of tax payable or
- Deferral of payment of corporate tax or

If the transaction or arrangement avoids an obligation to deduct corporate tax, it shall also be regarded as a corporate tax advantage arising from the transaction or arrangement.

Explanation

It is worth noting that these Rules are applicable even for the transition period from when the law was published until it became effective.

That means If any taxable person has tried to alter their transaction or business model during the transition period to obtain only tax benefits, the GAAR Provisions will apply to such transaction or Business Strategy.

As long as a valid commercial rationale behind any restructuring/changes to the business model can be justified, General Anti-Abuse Rules provisions shall not be invoked under CT law.

Accordingly, we must be careful of this aspect and maintain adequate documentation to justify the commercial rationale behind any restructuring or changes made to the business.

Company A has a total Income of AED 600,000. Its Corporate Tax Liability under CT Law will be as follows –

Total Taxable Income = AED 600,000
Corporate Tax rate = 9%
Total CT liability = Up to threshold of AED 375,000 – No Tax Liability
On balance Taxable Income = (600,000 – 375,000) X 9% = AED 20,250

Tax planning by splitting business

Here, Company 1 splits into Company 1 and Company 2 - so that Corporate Tax Liability is computed separately and threshold limit is availed by both the companies as against in the initial case.

Before the Split, the liability of the company was AED 20,250.

However, after the split, both Company 1and Company 2 will be individually able to avail the threshold limit for corporate tax computation. As both the company’s taxable income is within the threshold limit. Corporate Tax liability is zero

Analysis under UAE’s General Anti-Abuse Laws:

Commercial Rationale:

This transaction lacks a valid commercial reason. The Split of Company 1 into Company 1 and 2 is intended to avoid Tax payments by taking advantage of Threshold limit under Corporate Tax Law

Tax Advantage:

In the above example, both the basic conditions for invoking the General Anti-Abuse Rules are satisfied:

Transactions or arrangements should be entered without any valid commercial rationale and
The main purpose of undertaking such a transaction is to take advantage of corporate tax law.

Therefore, the Tax Authority may invoke the GAAR Provision for the above-mentioned transactions.

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Cases where General Anti Abuse Rules Provisions Can Be Invoked by the Authority

Following are the cases/ situations where the FTA may invoke the provisions of GAAR:

Artificial Separation of Business:

Artificial separation refers to the practice of knowingly dividing a business into smaller entities to make it qualify for the tax benefits available as per the provisions of Article 21 related to Small Business Relief. (as explained in the above illustration)

Where the FTA establishes that one or more persons have artificially separated their business or business activity and the aggregate amount of revenue across the persons’ entire business or business activity exceeds the threshold of 3,000,000 AED in any tax period, and such one or more persons have elected to apply the small business relief, such artificial separation shall be regarded as tax abusive arrangement and attracts the provisions of General Anti-Abuse Rules under Article 50.

Specific Transaction or Arrangement:

The GAAR provisions can apply to any tax evasion transaction. Under GAAR provisions, the authorities get wide power and coverage to deny the undue tax advantage taken by the taxable person.

What Constitutes Corporate Tax Advantage?

As explained above, any transaction or arrangement that results in benefit in the form of, but not limited to, reduced tax liability or evading tax liability completely or results in Refund of Tax/increase in refund of corporate tax or deferment of payment of Corporate Tax.

Things that Authority Must Consider For the Purpose of Determining GAAR Provisions:

The tax authorities will have to consider multiple factors to determine the economic reality and applicability of GAAR to transactions and arrangements. UAE law provides an illustrative list of the following factors that should be considered:

Manner of transaction:

How the agreement or transaction was made, signed, and carried out.

Nature of the transaction:

The form, substance, and other relevant details of the arrangement or transaction.

Timing of the transaction:

When the transaction or arrangement was entered into or carried out.

Result of the transaction:

The outcome of the transaction or arrangement in terms of how the UAE Corporate Tax Law is applied.

Change in Financial Position of Taxable Person:

Any modification to the taxable person’s financial situation that has been, will be, or may reasonably be anticipated to be caused by the transaction or arrangement.

Change in Financial Position of another Taxable Person:

Any modification to another Person’s financial situation that has been, will be, or may reasonably be anticipated to be caused by the transaction or arrangement.

Creation of rights or obligations of transacting parties:

Whether the transaction or arrangement has created rights/obligations which would not normally be created between independent, unrelated parties.

Any other mitigating facts or circumstances.

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Impacts of Invoking GAAR Provision by the Authority

Under UAE CT Law, the tax authority could counteract or adjust CT advantages obtained in the following ways:

Determination by the FTA:

The tax authority (FTA) can use GAAR to identify and adjust unintended corporate tax benefits gained through tax avoidance. They have broad power to issue an assessment allowing or denying exemptions, deductions, or reliefs claimed by a person for doing tax avoidance transactions or arrangements.

The invocation of the GAAR of one taxable person can also impact the income calculation of another person. The FTA can essentially shift the denied benefits to another taxpayer to reduce the person’s tax liability.

Characterization of Payments:

GAAR provisions give wide powers to the tax authorities to re-characterise the payment or any part thereof, disregarding the effect of other CT provisions.

Example:

The company holding properties and earning rental income transfers the property in the name of the Individual to shift the business income to a personal income. Here, the Intention is to avoid tax liability, as rental income from property earned by individuals is not subject to corporate tax. Tax authorities may invoke GAAR provisions to examine the transactions and may consider the rental income as income of the business and hence make it taxable.

Corresponding Compensating Adjustment

While applying GAAR provisions, if FTA has made any adjustment according to the rules, then CT Law specifically provides for a corresponding compensating adjustment to the corporate tax liability of any other person affected by the determination made by the tax authorities.

To avoid General Anti Abuse Rules Risk, the Taxable Person must consider the following:

1. Demonstrate that transactions have genuine commercial and economic substance

Taxpayers must demonstrate that transactions have genuine commercial and economic substance and are not solely undertaken for tax avoidance purposes.

2. Comprehensive documentation explaining the commercial rationale

Detailed defence documentation explaining the commercial rationale behind transactions is essential.

3. Explain the reasons behind actions

The "Look at" approach is no longer valid but focuses on explaining the reasons behind actions.

4. Assess commercial objectives through alternative scenarios

A taxable person must assess the commercial objectives of truncations or arrangements through all the alternative scenarios.

5. Validate the intention behind the transactions/arrangements

A taxable person should validate the transactions or arrangements before entering the same so that it should not invoke the general anti-abuse rules provisions.

Conclusion

Implementing General Anti-Abuse Rules (GAAR) under Article 50 of the UAE Corporate Tax Law indicates a robust mechanism whose objective is to curb tax avoidance practices and ensure correctness and fairness in the tax system. These rules serve as a deterrent against the misuse of tax laws by individuals or entities seeking to gain undue corporate tax advantages through artificial transactions or arrangements which lack genuine commercial rationale.

Through GAAR provisions, the tax authority possesses broad powers to scrutinize transactions, assess their true economic substance, and counteract any unintended tax advantages obtained through tax avoidance. This includes recharacterizing transactions, disallowing deductions and imposing penalties to mitigate future non-compliance.

Also, the incorporation of Specific Anti-Abuse Rules (SAAR) along with the GAAR provides a comprehensive framework to deal with specific tax evasion practices and ensure transparency and compliance within the tax regulations.

To reduce the risk of GAAR invocation, taxpayers must ensure that their transactions have genuine commercial and economic reality and are supported by comprehensive documentation which explains the commercial rationale behind entering such arrangements or transactions. Moreover, validating the transactions before implementation and assessing their commercial objectives through alternative scenarios are crucial steps in avoiding potential GAAR implications from tax authorities.

Ultimately, the invocation of GAAR provisions helps tax authorities to make sure that every taxable person pays their fair share of taxes which keeps the tax system fair, and it also encourages people to follow the rules. This also ensures that there’s enough money for important aspects like supporting the country’s growth and development in the long run for sustainable economic growth and development.

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FAQ?

Can authority invoke GAAR Provisions based on suspicion?

A. Article 50 provides two conditions to apply the GAAR provisions (Valid commercial transaction that reflects economic reality and purpose should be to obtain CT advantage), and both conditions are cumulative and should apply to invoke GAAR. There should be a reasonable conclusion about the satisfaction of both conditions. So, mere suspicion about the satisfaction of conditions cannot trigger GAAR provisions.

Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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Corporate Tax Registration on EmaraTax: The Complete Guide

Bijal

April 8, 2024

Understanding the Basics of Corporate Tax in UAE

Corporate Tax Registration on EmaraTax: The Complete Guide is a comprehensive look at the legal requirements related to corporate tax registration, documents required, procedures to follow, and mistakes to avoid. Read the article for a step-by-step guide for Corporate Tax Registration on the EmaraTax portal.

Corporate Tax (CT) is a direct tax levied on the net income or profit of corporations and other businesses. CT is also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
A competitive CT regime based on international best practices is expected to cement the UAE’s position as a leading global hub for business and investment and accelerate the UAE’s development and transformation to achieve its strategic objectives. The introduction of a CT regime also reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.
The UAE CT regime has become effective for financial years starting on or after 1 June 2023.

Examples:

A business with a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (the beginning of the first financial year starting on or after 1 June 2023).
A business with a financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (the beginning of the first financial year starting on or after 1 June 2023).

Who should register for Corporate Tax?

Every taxable person, including Free Zone Persons, must register with the Federal Tax Authority (FTA) under the CT Law regime. Every person carrying out business or business activities in the UAE under the license must obtain a tax registration number.

Timeline for Corporate Tax Registration

All the Taxable persons must register under the Corporate Tax regime as per the timeline prescribed by FTA via decision no.3 of 2024.

Corporate Tax Registration Timeline for Taxable Persons: FTA Decision No-3 of 2024

On 28 February 2024, Federal Tax Authority (FTA) has released decision no.3 of 2024 stating the Timeline for Registration of Taxable Persons for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments. The key highlights of the decisions are outlined below:

CT Registration Timeline: Key points to be taken into consideration

Effective date of this Decision is March 1, 2024.
In our view, first issue month (Original Issuance date mentioned in the Trade License) is to be considered for determining the deadline for CT registration.
The earliest Deadline for submission is 31 May 2024 for the companies that have January or February as the license issue month.
Penalty of AED 10,000 will be imposed on non-submission of Corporate Tax Registration application rather than on obtaining Corporate Tax

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Timeline for Corporate Tax Registration on EmaraTax portal

Timeline for Tax Registration of Resident Juridical Persons that are incorporated or established or recognised before March 1, 2024 are:

For resident Juridical person that have more than one license, in such case the license that was issued earliest shall be considered.

Month of Issue of License irrespective of year of issuance of license	Deadline for Submitting a Tax Registration application
1 January - 31 January	31 May 2024
1 February - 28/29 February	31 May 2024
1 March - 31 March	30 June 2024
1 April - 30 April	30 June 2024
1 May – 31 May	31 July 2024
1 June - 30 June	31 August 2024
1 July – 31 July	30 September 2024
1 August – 31 August	31 October 2024
1 September – 30 September	31 October 2024
1 October – 31 October	30 November 2024
1 November – 30 November	30 November 2024
1 December – 31 December	31 December 2024
If a person does not have a license on March 1, 2024	3 Months from 1 March 2024 (i.e., before the end of May 2024)

2.Timeline for Tax Registration of Resident Juridical Persons that are incorporated or established or recognised on or after March 1, 2024:

Category of juridical persons	Deadline for Submitting a Tax Registration application
A person that is incorporated or established or recognised under the applicable legislation in the State, including a Free Zone Person.	3 months from the date of incorporation, establishment or recognition.
A person that is incorporated or established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the UAE.	3 months from the end of the Financial Year of the person.

3. Timeline for Tax Registration of Non-Resident Juridical Persons:

- Became non-resident taxpayer before 1 March 2024:
  - A person that has a Permanent establishment in UAE: must register within 9 months from the date the permanent establishment came into existence.
  - A person that has Nexus in the UAE: must register within 3 months from 1 March 2024 (i.e. before the end of May 2024).
- Became non-resident taxpayer on or after 1 March 2024:
  - A person that has a Permanent establishment in UAE: must register within 6 months from the date the permanent establishment comes into existence.
  - A person that has Nexus in the UAE: must register within 3 months from the date the nexus was established.

4. Timeline for Tax Registration of Natural Persons:

- Resident Natural Persons whose total turnover exceeds AED 1 Mn in a Gregorian calendar year (January-December): before31 March of the subsequent Gregorian year
- Non-residents Natural Person conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total Turnover derived in a Gregorian calendar year exceeds AED 1 Mn: within 3 months from the date the individual became a UAE taxpayer.

5. An administrative penalty of Dh10,000 will be imposed for late registration of UAE Corporate Tax. This penalty is applicable to businesses that fail to submit their Corporate Tax registration applications within the aforementioned timelines set by the FTA.

What is the EmaraTax Platform?

EmaraTax Platform is the Official website managed by the FTA (Federal Tax Authority of the UAE) that offers various digital services to UAE Businesses. The services include handling Tax Registration, Filing of Returns, Payment of Taxes and Applying for tax refunds under the UAE CT Law regime. Read further to know how to register for corporate tax in UAE.

What are the Documents Required for Corporate Tax Registration on EmaraTax?

Documents required for CT Registration on EmaraTax Portal:

Certificate of Incorporation and Copy of all the latest Trade licenses.
Copy of Memorandum of Association & Articles of Association / Partnership Agreement or any other document showing ownership information about the business.
Registered office address.
Financial Year adopted by a Taxable person to prepare financial statements.
Copy of the latest Emirates ID and Passport of the Owners/shareholders, along with details of their shareholding in the business.

What are the Steps for Corporate Tax Registration on EmaraTax?

Steps to apply for CT Registration on the EmaraTax Portal:

Step 1 : Create an account / EMARA Tax Login

Create an account on the EmaraTax portal by registering with your email ID and Phone number or logging in using your existing ID and password.

Step 2 : Entity Details Section

Select the appropriate option for Entity Type and Entity Sub Type.

Step 3 : Identification Details

Depending on the ‘Entity Type’ selected, you must provide the main trade license details in the identification details section.
Click ‘Add Business Activities’ to enter all the business activity information associated with the trade license.
Enter the mandatory business activity information and click on Add.
Click on ‘Add Owners’ to enter all the owners that have 25% or more ownership in the entity being registered.
Select ‘Yes’ if you have one or more branches, and add the local branch details.

Step 4 : Contact Details

Enter the registered address details of the business.
Do not use another company’s address (for example, your accountant). If you have multiple addresses, provide details of the place where most of the day-to-day activities of the business are carried out.
If you are a foreign business applying to register for UAE CT, you may choose to appoint a tax agent in the UAE. In such cases, provide the necessary details.

Step 5 : Authorized Signatory

Step 6 : Review & Declaration

This section highlights all the details you entered across the application. You are requested to review and submit the application formally.
After submitting your application successfully, a Reference Number is generated for your submitted application. Note this reference number for future communication with FTA.

Other Important Aspects:

Registration of Entity with foreign Corporate Shareholder under UAE CT Law Regime:

In CT application, under owner details tab, while mentioning details for corporate shareholders which is a foreign entity, the drop down does not contain any option for foreign trade license issuing authority. As a result, being a mandatory field, UAE trade licensing authority of registrant entity has to be selected in order to proceed to the next step of CT application

Want to be prepared for EmaraTax requirements? Get tailored support and stay ahead by partnering with FAME.

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What are the Mistakes to Avoid During UAE Corporate Tax Registration on EmaraTax?

Incomplete Documentation:

It is to be ensured that the documents submitted support the information you entered in the application. This would help to avoid any rejection or resubmission of the application later.

Expired Documents:

Please ensure all legal documents, such as the trade license, are current and not expired when submitting your application. Expired documents will delay processing, and FTA may raise queries accordingly.

Inappropriate Information:

The applicants are supposed to provide a ‘Date of Incorporation’ while applying for CT registration. Applicants commonly make a mistake to provide a Trade License Renewal date. However, here, it is expected to provide the Date of Incorporation of the entity. Such mistakes may lead to the rejection of the CT registration application by the FTA, UAE.

Selection of Options while applying for CT Registration with the FTA:

If the entity has selected entity Type as ‘Legal persons – Other’ in VAT Registration, then at the time applying for CT Registration Application, Applicant cannot edit the Type of Entity and it will be auto populated as ‘Legal Persons-other’. And eventually such application are accepted by the FTA

Post-Registration Responsibilities and Compliance

Regular Tax Return Filing:

Article 53 ‘Tax Returns’ provides that every taxable person is liable to file a return of income online within 9 months from the end of the tax period or by any other such date as directed by the FTA. Information to be disclosed in the tax return:

It is mandatory for the taxable person to disclose the following information in the tax return:

The tax period to which such tax return relates;
The name, address, and tax registration number of the taxable person;
Date of submission of the tax return;
The accounting basis used in the financial statements;
Taxable income for the tax period;
Particulars of the brought forward loss;
Particulars of the tax loss transferred and set off against the income of another taxable person;
Particulars of withholding tax credit and foreign tax credit;
Corporate tax payable for the tax period.

Exempt categories of persons are also needed to register under UAE CT Law and need to file a declaration with FTA for the same.

The parent shall file the tax return for the ‘Tax Group.’
The FTA may decide on the different forms and particulars to be submitted by different categories of the taxable person.

Due date to submit the tax return:

Return is to be filed within 9 months from the end of the relevant tax period or by such other date as may be decided by the FTA.

Audits and Assessments:

Audit & Accounts:

A taxable person with revenue exceeding AED 50,000,000 (fifty million dirhams) during the relevant tax period and a Qualifying Free Zone Person will be required to prepare and maintain Audited Financial Statements.

Taxable and exempt persons shall maintain all records and documents for a period of (7) seven years.

Assessments:

Once the taxpayer files the return of income, the next step is processing the return of income by the FTA. The FTA examines the return of income for its correctness, commonly referred to as ‘Assessment.

The FTA shall issue a tax assessment to determine the corporate tax payable, corporate tax refundable or any other matters as prescribed by the CT law and notify the taxable person within 10 business days of its issuance in any of the following cases:

The taxable person fails to apply for registration within the prescribed time frame;
The registrant fails to submit a tax return within the prescribed timeframe;
The taxable person fails to pay the payable tax as per the tax return submitted within 9 months from the end of the tax period;
The taxable person submits an incorrect tax return;
The registrant fails to calculate tax on behalf of another person when he is obligated to do so under the tax law;
There is a shortfall in the payment of tax as a result of a person evading tax or as a result of a tax evasion in which such person was involved;
Any other cases in accordance with the CT Law.

Audits and Assessments: Penalties for Non-Compliance

Administrative Penalties:

If the taxable person fails to submit a tax registration application within the prescribed time limit, then the administrative penalty would be as follows:

Description of Violation	Administrative Penalty Amount in AED
Failure of the Person Conducting a Business or Business Activity to keep required records and information as per the provisions of UAE Corporate Tax Law.	One of the following penalties shall apply: 1. 10,000 for each violation OR 2. 20,000 for each repeated violation within 24 months from the date of the last violation.
Failure of the Person Conducting a Business or Business Activity to submit the data, records and documents related to Tax in Arabic to the Authority when requested.	AED 5,000
Failure of the Taxable Person to submit a Tax Registration application within the timeframe specified by the authority in accordance with the Corporate Tax Law	AED 10,000

Seeking Professional Help for Tax Registration on Emara Tax

Hiring a tax consultant in the United Arab Emirates (UAE) to comply with the country’s Corporate Tax (CT) laws can offer multiple benefits. The following are a few advantages:

Smart Advice:

They know UAE tax rules inside out and talk to you like a friend, not a tax robot.

Custom Plans:

They make tax plans that fit your business like a glove—no generic stuff.

Time Saver:

They handle the tax fuss, giving you more time for your job.

No Fines, No Stress:

Keep up with deadlines, avoid fines, and wave goodbye to tax stress.

Audit Buddy:

If a tax audit happens, they’ve got your back. Less stress, more support.

Save Money, Not Spend:

Yeah, you pay them, but it’s an investment. Saves more than it costs.

Money Talk, Plain and Simple:

They explain how tax moves affect your money. No fancy talk, just straightforward advice.

Connections Beyond Tax:

Need more than tax help? They’ve got a network for legal and money matters.

So, a corporate tax consultant isn’t just an expense. It’s a wise move. They bring smarts, keep you in the tax game, and set you up for business success.

Conclusion

The UAE government has introduced the Corporate Tax (CT) and positioned the country as a business and investment hub. It demonstrates the UAE authorities’ commitment to bringing transparency into business dealings. The introduction of corporate tax in the UAE will boost the economy and attract foreign direct investment.

Businesses in the UAE need to assess the applicability of the corporate tax law for their entities and establish sound record-keeping and compliance practices to comply with the legal requirements. The businesses need to train their staff and follow the updates and ministerial decisions issued by the UAE Federal Tax Authority. Make use of our corporate tax registration guide, be ready with documents required for corporate tax registration in UAE and comply with the CT registration requirements.

The Federal Tax Authority maintains the EmaraTax Portal, which streamlines Corporate Tax Registration in the UAE. In addition to Corporate Tax Registration, we offer Tax Representation and Litigation Support services, helping businesses ensure compliance and resolve any tax-related disputes efficiently.

Simplify your corporate tax registration on EmaraTax! Discover how FAME Advisory can help you with EmaraTax Platform.

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Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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Refund of Corporate Tax: Article 49 of Corporate Tax Law

Bijal

March 12, 2024

When can the Application for Refund of Corporate Tax be Made?

As per Article 49 of corporate tax Law, there may be instances where a taxable person has paid more than the corporate tax due under the law to the FTA through withholding or actual payment. In such a case, the taxable person can claim a corporate tax refund.

The Taxable Person may apply to the FTA for a refund in line with the requirements of the Tax Procedures Law in the following instances:

Withholding Tax Credit exceed Corporate Tax Payable

If the withholding tax credit exceeds the corporate tax payable under the UAE CT Law

Corporate Tax Paid More Than Tax Actually Payable

If the taxable person has paid corporate tax in excess of its corporate tax liability

Situations when Refund of Corporate Tax is Not Available

There are some specific cases when a person can’t apply for a refund as mentioned below:

Amount of Tax disputed

It finds that there are other disputed tax amounts in relation to that taxpayer

Taxable Person is subject to Tax Audit

If the taxable person is subject to a tax audit, and the conditions set out in a decision of FTA’s board of directors have been met

Order of Competent Court

In accordance with an order of the Competent Court

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Revision of Application for Refund of Corporate Tax

Tax Refund Procedures defined as per cabinet Decision no. 74 of 2023 are mentioned below:

The Taxpayers entitled to a refund under the Corporate Tax Law can submit a formal application to the FTA in the form and manner determined by the Authority.

Upon receipt of the Refund application, the FTA will assess it within 20 business days from the submission date. This timeframe may be extended if additional information is required, with due notification to the taxpayer.

Upon approval of the refund application, the FTA will initiate the repayment process within 5 business days of notifying the taxpayer in accordance with the repayment mechanism determined by the Authority.

The FTA may defer processing a refund request if the taxpayer has outstanding tax returns. Once all due returns are submitted, the refund, including any resulting excess amount, will be processed.

Set-off and Intimation by FTA

The FTA shall set off the amount requested to be refunded against any non-disputed tax or administrative penalties payable by the applicant taxpayer before refunding any amount.

Case Study

Green Tech FZ, a Dubai Media City company, discovers they overpaid corporate tax due to qualifying R&D expenses. Here’s how the revised refund process helps them:

Eligibility Check: They confirm that R&D expenses qualify for a tax deduction, potentially leading to a refund.
Application Submission: They gather documents (financial statements, tax calculations, R&D expense proof) and submit an electronic application through the FTA website (format defined by Decision No. 74).
FTA Review: The FTA reviews the application within 20 business days (extendable) and may request additional information.

Possible Outcomes:

Approval of Refund: If the claim is valid, the FTA initiates the refund process within five business days using their designated mechanism (e.g., bank transfer).
Deferment of Refund: The FTA may defer the refund process date if additional clarity or documents are needed from Green Tech FZ.
Denial of Refund: The FTA may deny the refund if R&D expenses don’t meet deduction criteria. Also, for this FTA, we will provide a detailed explanation of the decision.

Seeking Professional Help for Claiming Refund of Corporate Tax

A tax consultant can be helpful in the following manner:

Expertise in Tax Law: They stay updated on complex tax regulations and deductions and ensure the organisation’s refund claim aligns with current UAE Corporate Tax Law.
Identifying Refund Opportunities: Their experience helps uncover potential deductions businesses might miss while applying for refund amounts.
Streamlining the Process: They handle the application process efficiently and prepare all necessary documentation to minimise delays.
Communication with FTA: They act as your intermediary and communicate effectively with the FTA on your behalf. They also resolve any questions or requests for clarification.
Minimal Risk of Errors: Their expertise helps to avoid errors in your application and minimize the chance of rejection and potential penalties.

Conclusion:

The tax refund procedures mentioned within the UAE Corporate Tax Law establish clear guidelines for eligible taxpayers seeking refunds under specific circumstances, such as overpayment or withholding tax credits exceeding the original tax liabilities.

After the taxpayer’s refund application is made, the Federal Tax Authority (FTA) conducts a thorough assessment within a defined timeframe and ensures transparency and adherence to regulations. After successful assessment and approval, refunds are promptly processed, but sometimes, they are also delayed if there are outstanding tax returns.

It’s important to note that non-compliance with tax regulations may incur penalties. Furthermore, the FTA’s authority to set-off refund amounts against outstanding tax or penalties emphasizes the government’s commitment to maintaining fiscal integrity.

Overall, these procedures describe the UAE’s dedication to a fair, efficient, and compliant corporate tax environment.

Explore how UAE’s General Anti-Abuse Rules Impact Your Business Partner with us to navigate your compliance needs.

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FAQs?

1. Are GAAR Provisions applicable for Refund of Corporate Tax?

Yes, GAAR (General Anti-Avoidance Rule) provisions can be applicable for claiming a refund of Corporate Tax under the UAE Corporate Tax Law.

When evaluating a refund request, the FTA will consider the primary purpose behind the transactions or arrangements leading to the overpayment. If the main goal was to take undue advantage of the tax refund procedures and to avail fake refund benefits, then in such case, a GAAR challenge will apply.

2. Is there any limit for the minimum refund amount?

No, the UAE Corporate Tax Law does not currently specify a minimum refund amount

3. Who shall make the application for the Refund?

A taxpayer shall apply for a refund.

Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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Determining a Non-Resident Person’s Nexus in UAE for Corporate Tax Purposes

Bijal

February 13, 2024

The Corporate Tax Law has been introduced in the UAE and provides special treatment for the non-resident person’s taxation. Here is the article dealing with determining a non-resident person’s nexus in UAE.

Non-Resident Person’s Nexus in UAE: An Overview

Who is considered a Non-Resident Person?

As per the UAE CT Law, a Non-Resident Person is:

I. Natural Person who is not a Resident but

Has a permanent establishment (PE) in the United Arab Emirates Or
Derives state-sourced income

An individual who is not a resident but has a Permanent Establishment (PE) in UAE and an annual turnover of AED 1 million or more attributable to PE is considered a Non-Resident Person.

II. A Juridical Person incorporated outside of UAE and not effectively managed and controlled in the UAE will be regarded as a Non-Resident Taxable Person to the extent:

It has a Permanent establishment in UAE
It derives income from the UAE
It has a nexus in the United Arab Emirates by way of earning income from immovable property in the United Arab Emirates

When shall a Non-Resident Person be said to have a Nexus in the UAE?

Any non-resident juridical person would be treated as having a UAE nexus if he earns income from “immovable property” in the UAE.

A non-resident juridical person with a UAE nexus must register with the Federal Tax Authority ( “FTA”) and obtain a Tax Registration Number.

Income Attributable to Immovable Property:

Taxable income attributable to Immovable Property includes “income derived from the right in rem, sale, disposal, assignment, direct use, letting, including subletting and any other form of exploitation” of Immovable Property located in the UAE.

What shall be the Taxable Income if there is a Nexus in the UAE?

Income attributable to a Permanent Establishment or nexus:

Taxable Income derived from inside and outside the UAE by a Non-Resident Person from the Permanent Establishment or nexus in the UAE is subject to Corporate Tax.
Taxable Income is calculated for a Tax Period from the adequate standalone Financial Statements prepared by accounting standards accepted in the UAE.

Business or Business Activities of a non-resident natural person that are subject to Corporate Tax:

Non-resident individuals deriving income from the UAE are subject to Corporate Tax if annual turnover attributable to their Permanent Establishment in the UAE exceeds AED 1,000,000.

However, the corporate tax does not apply to income earned by salary, wages, income from personal investment, real estate investments without a license, etc.

State Sourced Income:

Article 13(1) of the Corporate Tax Law defines instances under which an income is considered State Sourced Income. Such State-Sourced Income earned by a Non-Resident Person is subject to Corporate Tax.

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How to determine the Permanent Establishment in UAE

The concept of a Permanent Establishment is used in tax regimes worldwide to determine if and when a foreign juridical person has established sufficient presence in a country to warrant the direct taxation of their profits in that country. Mainly, the term ‘Permanent Establishment’ is defined under the OECD and UN model convention and the international agreements entered between two contracting states to avoid double taxation.
Generally, a country only has the right to tax the profits of a foreign business if that business has a Permanent Establishment in that country.

The definition of ‘Fixed Place PE’ refers to the following essential criteria:

Existence of a ‘place of business’, i.e. a facility such as premises or, in certain instances, machinery or equipment
The place of business must be ‘fixed’, i.e. it must be established at a distinct place with a certain degree of permanence;
The enterprise carries on the business through such a fixed place of business

Places that constitute Fixed Place PE:

Article 14(2) defines permanent establishments where business operations occur. These include:

‘Place of effective management,’ where critical decisions are made.
A branch, office, factory, or workshop.
Real property like land and buildings.
Installations for natural resource exploration.
Mines, oil or gas wells, quarries, or extraction sites, including related vessels and structures.
Building sites, construction projects, or assembly/installation places lasting over six months, including activities by the non-resident person’s related parties.

Explanations:

Place of Effective Management (PoEM):

Place of Effective management is an internationally recognised test for determining the residential status of a company incorporated in a foreign jurisdiction. A Fixed Place PE is where essential day-to-day business decisions are made. While international terms use “Place of Management,” UAE CT refers to “Place of effective management,” defined in the explanatory guide as daily operational decisions, not just strategic or board meeting decisions.

Business Premises:

Branches, offices, factories, workshops, land, buildings and other real estate property are also examples of fixed-place permanent establishments

Installation or Construction PE:

Any installation for natural resource exploration, including mines, oil or gas wells, and quarries, creates a PE. A PE is also formed if a building site, construction project, or related activity lasts over six months. This includes not only construction but also infrastructure projects and equipment installation. The ‘six-month’ duration considers all sites, projects, and activities, including time spent by related parties. This threshold is sometimes exploited for tax avoidance, with work distributed among related entities to stay within the limit.

Dependent Agent Permanent Establishment

Multinational companies often appoint dependent agents in the UAE to conduct business and avoid creating a Fixed Place Permanent Establishment.

As per Article 14(1)(b), Where a Person has and habitually exercises the authority to conduct a Business or Business Activity in the State on behalf of the Non-Resident Person, such non-resident person is said to have a nexus in UAE.

‘Habitually exercising authority’ means consistently finalising or negotiating contracts leading to non-resident approval without significant changes. If an agent in the UAE routinely handles orders approved by the non-resident, they are deemed a dependent agent PE. T Independent agents, promoting goods without contract conclusions, are not considered dependent agents.

Preparatory or Auxiliary Activities do not constitute PE:

If a fixed place of business in the UAE is used only for the following specific purposes, it does not create a permanent establishment, including:

Storing, displaying, or delivering goods for the non-resident.
Keeping goods for processing by another party.
Purchasing goods or collecting information for the non-resident.
Engaging in preparatory or auxiliary activities for the non-resident.
Combination of all the above activities, as long as the overall activity is preparatory or auxiliary.

For instance, if an Indian company sells goods directly from India but maintains a warehouse in the UAE for quick deliveries, the warehouse does not create a permanent establishment in the UAE under these rules.

Use of place for job work:

Sometimes, a non-resident utilises job work services from providers in a different country. The non-resident sends and stores goods in the job work service provider’s location. This storage, specifically for processing by another party, does not create a permanent establishment.

Use of place for procurement:

If a non-resident uses a fixed place of business only for buying goods and does not conduct sales operations there, it doesn’t create a permanent establishment.

Any other place used for similar purposes:

If a place of business in the UAE is used for preparatory or auxiliary activities or a combination of such activities, it won’t create a permanent establishment. The place of business should not provide services to any other entity. Also, if someone outside the area uses the location for their specific activities, it doesn’t count as a permanent establishment.

Comprehensive Example:

Fixed Place Permanent Establishment:

XYZ Engineering Inc., an international firm, forms a subsidiary, XYZ Engineering Middle East LLC, in Sharjah, UAE, for a significant infrastructure project, which is responsible for making critical managerial and commercial decisions necessary for the successful execution of the project. The Sharjah branch is a fixed place Permanent Establishment (PE) per Article 14(1)(a) of the UAE Corporate Tax Law.

Dependent Agent Permanent Establishment:

ABC Tech Innovations, a foreign IT company, hires Mr. Khalid in the UAE as a consultant. Mr. Khalid, with the authority to negotiate and close deals, consistently secures new tech projects for the company. This makes him a dependent agent PE under Article 14(1)(b) of the UAE CT Law.

Exemptions for preparatory or auxiliary activities:

ABC Tech Solutions, a tech company in Dubai, leases a warehouse in the city to store its IT equipment. An external logistics provider manages the warehouse. This storage arrangement is considered a preparatory or auxiliary activity, per Article 14(3)(a) of the UAE Corporate Tax Law. Consequently, the warehouse does not qualify as a permanent establishment.

Exceptions to Exemption for Preparatory or Auxiliary Activities:

XYZ Tech Solutions has two offices. 1) in Dubai, UAE, and 2) has its principal office and research facility in Abu Dhabi. The research facility has been actively involved in significant activities related to the main office for more than six months. This collaboration goes beyond just supporting activities and forms a united business operation. According to Article 14(4)(b) of the UAE Corporate Tax Law, both places could be considered permanent establishments, meaning both the Dubai office and the Abu Dhabi facility may be liable to pay corporate taxes.

Other UAE Corporate Tax requirements for a Non-resident person

Record keeping and preparation of Financial Statements:

If the non-resident person has a business presence in the UAE, they have to calculate their taxable income. Non-residents must keep their tax records for seven years after the tax period ends.
Moreover, if a non-resident person registers for corporate tax, they need to follow the same rules as a Resident person.

Tax Return submission:

Both Resident and Non-Resident individuals must submit a Tax Return to the FTA and settle Corporate Tax within nine months after the relevant Tax Period ends.

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Application of General Anti Avoidance Rules (GAAR) provisions

The Corporate Tax Law’s Permanent Establishment rules have an anti-fragmentation provision to prevent abuse.

While there is an exemption from PE for activities of a preparatory and auxiliary nature, the CT law takes into account Action Plan 7 of the OECD’s BEPS Project on anti-fragmentation where a non-resident or its related party carries out activity in the UAE through another PE in the UAE and on the combined basis the otherwise auxiliary activities form a cohesive business operation of non-resident in the UAE.

This rule is a measure to prevent abuse where a unified business activity is intentionally broken into smaller parts. This rule ensures that businesses cannot claim each fragment as having only preparatory or auxiliary significance. Factors like geographical coherence, the nature of the activity, and the commercial reasoning behind outsourcing or fragmenting determine if the combined activities qualify as preparatory or auxiliary.

Examples:

For instance, if Company ABC from Country X expands to UAE and splits its operations into manufacturing, sales, and customer service in Country Y, the anti-fragmentation rule would assess the geographical connection, nature of activities, and reasons for division. If these fragmented operations still form a substantial business presence, they could be treated as a Permanent Establishment, subject to tax.

In summary, this law prevents businesses from exploiting tax loopholes by artificially fragmenting their operations, ensuring the genuineness and coherence of business activities.

Conclusion

In simple terms, understanding the relationship between Non-Resident Persons and the UAE is critical to making sense of Corporate Tax. These individuals, who could be natural or legal entities, have tax responsibilities based on their Permanent Establishment or connection in the country. For individuals, the main concern is if their business turnover goes beyond AED 1,000,000. For legal entities, the focus is on having a permanent establishment, earning state-sourced income, and creating a connection.
The idea of Nexus in UAE, especially for non-resident legal entities, is mainly about income from Immovable Property. This covers a wide range, from land and buildings to fixtures and equipment. The tax rates on such income are set, with no tax on the first AED 375,000 and a nine per cent rate after that. Those who qualify as Free Zone Persons have specific rules under the Free Zone Corporate Tax system.
Taxable Income, whether from a Permanent Establishment or connection, is determined based on Financial Statements that follow UAE accounting standards. Resident and Non-Resident Persons must submit Tax Returns within nine months of the relevant Tax Period and keep records for seven years.
Deciding if a Permanent Establishment exists in the UAE involves various factors, including the type of business premises, installations, and dependent agents. The idea goes beyond physical locations to include effective control, like in a ‘Fixed Place PE.’ For a ‘Dependent Agent PE,’ regular contract finalisation and consistent authority in conducting business activities for the non-resident entity are essential.
To stop misuse and fragmentation, the UAE Corporate Tax Law includes measures against avoidance. The case of Company ABC shows how anti-fragmentation rules work, highlighting the need for genuine and coherent business activities. The goal is to ensure businesses can’t exploit tax loopholes by artificially splitting their operations.
In short, to understand the connection of Non-Resident Persons in the UAE, it’s essential to follow tax rules, understand the criteria for Permanent Establishment, and be aware of provisions against avoidance. The UAE’s tax system aims to balance the promotion of foreign investments with the prevention of misuse, emphasising the importance of compliance for all entities operating within its borders. This balance is crucial for maintaining a fair and effective tax system.

FAQs?

Do NRIs pay double Tax?

No, NRIs don’t pay double tax as Article 25 of the DTAA between India and UAE provides for the measures that can help eliminate double taxation on the same income for citizens of both countries:

An Indian resident who has capital or earns income as per the convention may have to pay taxes in the UAE. However, they can get a deduction of the income tax paid in the UAE, but the deduction can’t be more than what they would owe in India before the deduction.

Similarly, if a UAE resident has to pay taxes in India under the agreement, they can get a credit for the income tax paid in India from their UAE tax obligation.

Is there a Double Taxation Avoidance Agreement (DTAA) between India and UAE?

Yes, a Double Taxation Avoidance Agreement (DTAA) exists between India and UAE. The India-UAE Double Taxation Avoidance Agreement (DTAA), formed in 1993, has been crucial in preventing double taxation and fostering economic collaboration. This pact addresses different taxes like income, wealth, and capital gains, offering clarity and relief to taxpayers in both countries. The agreement has enhanced the strategic and economic ties between India and the UAE by easing investment, technology transfer, and job creation.

Bijal

Bijal is a legal and tax compliance expert with over five years of experience in the UAE. She specializes in indirect tax reviews, corporate tax, and company secretarial compliance for multinational corporations. Bijal excels in preparing management accounts and securing UAE tax residency certificates. Currently focused on the proposed UAE Corporate Tax framework, she provides strategic advice for corporate restructuring and cross-border transactions, making her an essential resource for businesses navigating UAE Corporate Tax.

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Supply of Manpower Services (Example 1)

Supply- Exception to Visa Facilitation Service (Example 2)

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What is an Economic Substance Regulations (ESR) Audit Notice?

How is the Economic Substance Regulations (ESR) Audit notice issued?

What are the details asked under Economic Substance Regulations (ESR) Audit Notice?

How to Submit Economic Substance Regulations (ESR) Audit Response?

Economic Substance Regulations (ESR) Audit Conclusion

FAME Advisory’s Economic Substance Regulations (ESR) Audit Service

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What are Unrealized Gains and Losses Under UAE Corporate Tax?

Unrealized Gains:

Unrealized Losses:

What will treating the Unrealized Gains and Losses Under UAE Corporate Tax be?

Case Study for Treatment of Unrealized Gains and Losses Under UAE Corporate Tax

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What are Anti-Abuse Rules in Taxation?

General Anti-Abuse Rules Provisions under CT LAW

Cases where General Anti Abuse Rules Provisions Can Be Invoked by the Authority

Impacts of Invoking GAAR Provision by the Authority

To avoid General Anti Abuse Rules Risk, the Taxable Person must consider the following:

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Who should register for Corporate Tax?

Timeline for Corporate Tax Registration

Timeline for Corporate Tax Registration on EmaraTax portal

What is the EmaraTax Platform?

What are the Documents Required for Corporate Tax Registration on EmaraTax?

What are the Steps for Corporate Tax Registration on EmaraTax?

What are the Mistakes to Avoid During UAE Corporate Tax Registration on EmaraTax?

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When can the Application for Refund of Corporate Tax be Made?

Situations when Refund of Corporate Tax is Not Available

Revision of Application for Refund of Corporate Tax

Seeking Professional Help for Claiming Refund of Corporate Tax

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Non-Resident Person’s Nexus in UAE: An Overview

Who is considered a Non-Resident Person?